As soon as the herd turns, sell

Let's appreciate the bull market but stay alert for the warning signs

Iwas doing salary reviews at the end of last year. It was a good year for our clients, our newsletter, our members and ourselves. Everyone was happy, and we are casually assuming a similar backdrop next year, with similar growth. Normal stuff.

But this is a cyclical business, and when the stockmarket turns down things will become harder. There will be less demand for advice, less enthusiasm for investment generally, and that will translate into less trade, fewer new clients, fewer funds under management and, if it happens, some not-so-fabulous salary reviews next year.

I remember going into a morning meeting in April 2000 at Bell Securities. It was the middle of the tech boom and, as it turned out, it was the top. There were signs; there always are. Just before the GFC, for instance, the signs included three stockbrokers listing on the ASX at $2 (they all ended up below 50¢) and another putting its name on a football stadium.

In the tech boom, the sign was Andrew Bell in that morning meeting in April 2000. He announced that we had had the best day of commission ever. I had personally written $11,000 of commission the day before. One of our colleagues had employed an assistant just to process his orders – he was doing that many. Andrew told us to look around because, in the style of “it doesn’t get to look any better than this”.

In that meeting he unknowingly (knowingly?) called the top of the tech boom. It was as good as it ever got and, quite honestly, I’m not sure it has ever been that good/ easy/lucrative in this industry ever again. Perhaps some of the Bitcoin beneficiaries might disagree.

That meeting taught me a catchphrase that I have used many times since. “Normal is great.” It is only when things go bad that you appreciate how good normal is. At the moment we think that this bull market is normal – but it’s not, it’s great.

The last thing I want to do is to start the year being bearish. So let’s not; let’s call it appreciative of a bull market.

In the end, the one thing that will upset the financial markets is the herd. When the herd turns, it turns, and it can do so without planning or logic. It could happen for the most subtle of reasons, or the most obvious, so let us not sit complacently. We all have to recognise that we are in the hands of an animal and are not driven by logic or science. All we can do is watch for it and react to it.

So my game plan going into a new year is to take Kerr Nielsen’s advice and “run the market to the last minute”; it is our professional responsibility. Sell early and you can miss an infinite upside. Sell when the top has started and you can control how much downside you take. “But what if it crashes?” I hear you ask. The market very rarely gaps down without warning. We just have to hope we are attuned to the signs and do something about the sell-off before it turns into mainstream panic.

Managing the risk of a market correction is quite simple, really. Turn your screens on every day. Make decisions based on things that happen in fact, not guesswork. Contrary to common thinking, the stockmarket is not about predicting the future, it is not about having a crystal ball; it is about processing information, not imagining it, and the propensity for “talking heads” to make bold predictions to further their brand is not helpful at all – in fact, it is almost irresponsible, leading people into the dark pretending there is light.

It’s a bit trite but your best bet in this bull market is to stay invested, keep taking risk and not worry about predicting the top until it starts. And when it does, don’t sit there like a mullet quoting Warren Buffett. Sell something. Sure, it might be wrong but you can always buy things back.

Meanwhile, I am looking forward to any correction to finally buy all those stocks I wish I had bought already. You can’t do that unless you’ve sold something first.

So sleep well but wake up every morning willing to make decisions. And when it does correct, and the world is running around with its hair on fire, feeding the furnace with their fear, the bottom will emerge in the same way. Predicting the bottom is the same as predicting the top. Turn your screens on every day and wait for the rally to start.

You’ll need a watchlist of stocks you want to buy, and you might as well start that list now. It is the same as the list of stocks you wish you had already bought but didn’t. Stocks like CSL, Macquarie Bank, Magellan funds management, Platinum funds management, Treasury Wine Estates, Cochlear, Seek, Carsales.com, ResMed, REA Group, Janus Henderson, Monadelphous, Aristocrat Leisure, Boral, CIMIC, Computershare, ASX. And that’s before we get into the small and mid caps.